When the SEC proposed the broker-dealer exemption rule in 1999, few realized that it would result in a lawsuit against the commission and provoke a long and contentious debate about fiduciary duty.
At the time, exempting fee-based brokerage accounts from the fiduciary requirements of the Investment Advisers Act of 1940 made sense. Having brokers get some compensation from fee-based accounts was one of the recommended practices identified in a 1995 report from the Tully Committee on Compensation Practices, an SEC-directed review of compensation conflicts within the brokerage industry.
In proposing the 1999 exemption, the SEC said fee-based brokerage accounts benefit investors “by aligning their interests more closely” with the firm and individual broker.
At the same time, the agency granted what amounted to a no-action letter for the brokerage industry, promising no enforcement cases against those using the fee programs. Wall Street firms, which had close to $300 billion in fee-based brokerage accounts, supported the SEC's proposal.
Financial planners and investment advisers, who already were covered under the fiduciary requirements of the Advisers Act, vehemently opposed it and dubbed the exemption the “Merrill Lynch rule.”
For the next five years, the SEC did nothing with the proposal, prompting the Financial Planning Association to file a lawsuit against the agency in July 2004.
“The SEC wasn't being responsive,” said Duane Thompson, a senior policy adviser at Fi360 Inc., who was the FPA's top lobbyist at the time.
As a result, the SEC went back to the drawing board and re-proposed the rule in January 2005, approving a final version that April.
That didn't stop the FPA, which took its case up to the U.S. District Court of Appeals for the District of Columbia, which ruled in its favor in 2007. The SEC did not appeal, forcing brokerage firms to convert fee-based brokerage accounts onto advisory platforms.
Mr. Thompson says the epic fight made the public aware of the “absence of a level playing field, with investment advisers under a fiduciary standard and brokers under a sales standard.”
While the FPA won the battle, the fiduciary war is far from over. Just how confused consumers remain was highlighted in a January 2008 Rand Corp. study, which confirmed what most in the industry knew Investors assumed that advisers and brokers who offered the same services were subject to the same standards of customer care.
Just a few months later, the financial crisis began to unfold in earnest when The Bear Stearns Cos. Inc. was rescued by JPMorgan Chase & Co., setting the stage for major financial reforms from Washington.
In June 2009, President Barack Obama's new administration proposed a fiduciary standard for broker-dealers as part of a reform package. Then-SEC Chairman Mary Schapiro delivered a speech calling for a fiduciary duty for “all financial service providers that provide personalized investment advice about securities.”
The Obama administration's support “re-energized the debate,” Mr. Thompson said.
Wall Street's trade group, the Securities Industry and Financial Markets Association, saw the writing on the wall and in July 2009 announced for the first time its support for a uniform fiduciary standard of care — one that would somehow meld the fiduciary duty and suitability rule into a new standard.
The Dodd-Frank Act, signed into law July 2010, gave the SEC power to impose on broker-dealers a standard of conduct “no less stringent than the standard applicable to investment advisers,” and a January 2011 SEC staff study recommended that very action.
But exactly how to accomplish that goal has proven to be a tough task.
“Congress gave the SEC a very difficult assignment: Craft a standard as stringent as the '40 Act that's not the '40 Act. I don't know how to do that,” said Skip Schweiss, managing director of adviser advocacy at TD Ameritrade Institutional.
“We very much want the SEC to articulate, for the first time, what a fiduciary standard of care is, and provide guidance on how one can comply with that,” said SIFMA general counsel Ira Hammerman.
In March, the SEC asked for comments about the costs and benefits of imposing different standards of care, and said it will also use the information to consider ways to harmonize regulation.
But observers contend that with new commissioners and competing priorities at the SEC, it's impossible to know what the agency will do — and when — on the fiduciary issue.
“The timing is hard to predict, but the issues are not going to go away,” Mr. Hammerman said.
